Silver Breaking Out of Triangle 11-28-17

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Silver has been trading in a very tight range for a couple months.  The chart has the appearance of a symmetrical triangle, but has experienced some choppy action at both boundaries of the triangle.

Today there was an obvious close below the lower/lowest boundary of the triangle.  This occurred with a marked increase in volume, suggesting a possibly complete triangle formation with further downside action to follow.

The chart above projects some measure type moves based upon the chart and price formation.  The early October low would be the bare minimum expected move to the downside.  But the 15.00 to 14.50 over the next 1 to 4 weeks would be a reasonable move.  That seems like a large move given recent action, but just this calendar year you can see many up and down moves on the chart which of that size or greater.

SPY and Stocks Probably Very Near to Intermediate Term Highs

I will do further analysis after closing figures are complete for today, but based on this afternoon's current data that I am estimating from, it appears that the current move in SPY is likely to be very near an intermediate peak in prices.

Based on a few simple back-test studies on put/call ratios and VIX readings, the backtests suggest about a 2 or 3 times greater downside risk over the next 2 months compared to upside potential.

Now these scans are by their nature not inclusive of all market conditions, and every market environment is unique, but from past experience with observing markets and running back tests for comparable conditions, I feel that the market has limited upside potential from here for several weeks or months.

I will provide further stats tomorrow or possibly this evening.


Pete

Change of Character in Trend - Lower Bollinger Band Probable Target - SPY 11-10-17

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The chart here is SPY on a daily time frame.  It shows several months of the recent uptrend and nicely illustrates simple concept in technical analysis pertaining to Bollinger Bands.

Once the center line is crossed on a closing basis, the idea is that the nearest band becomes a price target.  So in an uptrend, when prices close below the 20 day average center line in this case, the lower band becomes a price target.

In this case we can see the action in June where prices closed below the band in the second half of June, and then tagged the lower band after about 5 days.  In August, there was a wide range break below the mid point that tagged the lower band the same day.

Now notice the current trend up since August.  I have marked with green arrows the 4 days at which price came down to touch the center line.  Each day price reversed to close off its low and above the mid point.

Now when I see something like this, it indicates to me that program trading may be coming in using the center point as a buying trigger.  But here is a more subtle point I have picked up on over the years and have written about here before.

If you look at the last 3 times the mid point was touched (before yesterday), you can see that the next day gapped up.  In fact the next 2 days gapped up in all 3 instances.  Similar comments apply to the March 9 and 14 center line reversals as well as the June 16 center line reversal.  Gaps ups following the center line test, generally indicate "successful" short to intermediate term tests of the center point.
So the norm for a continued trend is the programs kick in to buy at the mid line and then continue the buying into the next session and create the gap ups.

So when the character changes and price does not gap up, PAY ATTENTION.  To me it indicates that the normal trend continuation program buying pattern is not in place. 

In fact a decent size gap down the following day, indicates a failed test of the average and a probable quick test of the lower band.

This morning prices are set to gap down moderately.  Coupled with the clear bearish divergence at the recent highs and the weak/negative breadth as evidenced by the McClellan oscillator being negative for a couple weeks as price rose, I would suggest that this current gap down will likely lead to a quick move to the lower bollinger band.

Currently the near term support on a move down is 254.00.  But I think prices clearly have more risk than this to the downside in the coming couple weeks.

The last time I remember such and extended period of negative McClellan oscillator readings as prices were making higher highs was Sept 2014 before the vertical decline into mid Oct. 2014.


Pete

Low VIX Readings - Probable Short Term Weakness

I ran a simple scan over the weekend looking at time when price on SPY made a new 52 week high, and also the VIX closed at or below -1.9 standard deviations from its 20 day average.

That was the simple set-up which occurred Friday.

The stats show about 2. to 1 greater MAX loss than MAX gain over the next 3 and 5 days.  The skew is still notably negative at 1.75:1 at the 1 month mark forward from the signal.

Also I looked at some option today, and noted that the 259 strike put on SPY which expires this Wednesday Nov 8, was trading at a level that only required a 0.39% decline, by close on Wednesday to take the option to a 100% or greater gain.

So I looked at the 27 instances that I filtered from the above scan, and found that 22 out of 27 instances declined at least 0.39% within the next 3 days.  So there is about an 81% chance of a double or more in the option value by this measure, and seems to be a reasonable speculative play.

A Few Thoughts on Stocks Here 11-1-17

Today there is an FOMC statement to be released.

Tech stocks have pushed higher the last week, but to me it appear to be an exhaustion type move, as evidenced by the following chart.

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This chart is XLK on a daily time frame.  It is a tech stock ETF.  What I have drawn is an upper channel line which connects the previous price peaks during the uptrend.  A touch or break of such a trend channel line is often an exhaustion point for a move.

Couple that with the fact that the recent gap up from last Friday was the largest gap up in a couple years, it smacks of an exhaustion gap from a charting standpoint.  Is that gap up on the earnings news almost 2 years into a 65% run up in prices a "smart money" gap?  Or is it a "dumb money" type gap after the news is out?  I think more of the later.

Click on Chart to Enlarge

This chart is a weekly chart of the Dow futures contract with associated Commitment of Traders data below the price chart.  When analyzing the CoT data, there are a few common patterns that show up at reversal points on the chart.

One of the key points in CoT is always extreme positioning between the market participants and their historical range of contracts held.  We have seen extremes in the chart for sure as it pushed to new highs in 2016.  Other index contracts are hitting or near extremes on this rally also.

However, an even more notable signal than the extreme position is a "blow off" pattern in the futures where the "smart money" commercial traders hold an extreme position, but then price continues to rise and there is a break from their pattern of selling on price rises.  Instead we see the commercial group decreasing their short position substantially as prices rise.  That indicates a typical finale to a rally where the speculators "won".  They cashed out into a strongly rising prices.

That is what we are seeing on this Dow chart.  The commercial pattern of selling into the price rise was standard until October began.  Then for the last month, price has risen very sharply while commercials have bought and large specs have sold.

Once the run is done, this could result in a substantial decline, even a bear market.

Not all of the index contracts are displaying the same pattern, but this one has a classic bull market peak type of look to it, and so I am paying attention.


On a shorter term note, I back tested SPY data looking at opening prices outside the upper bollinger band on a gap up as is occurring today.  I also added various other conditions which are currently present in the market to gauge the short term expectation.

The only real significant finding is for the same day.  There is about 2 to 4 times greater MAX loss than MAX gain on the day of this finding.  The forward returns after the close of the signal day were flat to typical.

So given this tendency for a close below the open, and some of the exhaustion signals occurring, I wonder if the FOMC news will lead to a sell the news response here.

We will see.


Pete